NETHERLANDS - The €3.4bn pension fund of telecoms giant KPN has decided to change its policy on inflation-linked benefits from 80% of the salary index to 100% of the price index.

Because of this change, its deferred participants and pensioners will receive a one-off one per cent extra compensation for inflation, on top of the regular indexation of 1.4%.

The scheme's active members have been granted an indexation of almost 1.2%.

The Stichting Pensioenfonds KPN reported an overall return on investments of 2.7%, while its cover ratio has risen by 6.3% to 137.8% at year-end.

The scheme made clear that its return has been affected by negative results of interest rate swaps of -1.6%, caused by the rise of long-term interest rates. In line with its policy - aimed at a total hedge of 53% - it has also hedged its interest risks through long-term bonds.

Mainly thanks to the rise of oil prices, commodities was KPN's best performing asset class, with returns of 30.5%.

Its equity investments yielded 4.8%, partly because of positive results of a hedge of the US dollar and the British pound, according to the scheme's annual report. Its 40.7% equity allocation is being managed through multi-manager funds, which hire specialist external asset managers.

KPN's fixed income portfolio - divided up into two passively and one actively managed investment fund - returned 1.1%.

To decrease its exposure to inflation, Pensioenfonds KPN has doubled its allocation to inflation-linked bonds to 10%, at the expense of bonds from the EMU area, the report said, adding that exposure to corporate bonds will by raised by 10% to 50%.

Property investments yielded 6%, with listed property and Asian non-listed property returning -28% and 29% respectively. Hedge funds returned 1.7%, while global tactical asset management showed a negative yield of -10.9%.

The KPN pension fund has 51,225 participants in total, of whom 19,745 are employees. The scheme has 20,910 deferred members and 10,570 pensioners.